This a brief note on a recent book entitled “This Time is Different: Eight Centuries of Financial Folly”, which I thought our readership might enjoy. Carmen M. Reinhart and Kenneth S. Rogoff have been widely quoted in investment commentaries, by other notable academics, and in the financial press. The book discusses financial crises of all sorts, involving up to 66 countries, and going back to the 1300s. It covers debt defaults (sovereign and domestic), hyper-inflation, currency crises, and stock market crashes.
Among the best known books on financial crises is Charles P. Kindleberger’s “Manias, Panics and Financial Crises”. Reinhart and Rogoff’s book stands out in that it catalogues both the surprisingly high repetition of financial crises and the equally surprising frequency of participants who believe “this time is different.”
Below is a summary of the Main Takeaways:
- Excessive debt is a common theme throughout, and is illustrated in the very earliest of financial crises dating back to the 1300s. Related topics include the concept of a “tipping point” in the government debt to GDP ratio.
- Banking crises are indiscriminate – they happen to both rich and poor countries, in remarkably similar fashion, and unfortunately have the characteristic of ensuing extreme recessions.
- The author’s original work on a “crisis index” is quite valuable in providing a measure for comparing different types of crises across time and country.
- Another original contribution is the authors’ “prototype for a sequence of crises”, which draws together the work of many economists, including Kindleberger’s. It illustrates the common patterns in which crises unfold
- The “this time is different” syndrome in the U.S. financial crisis of 2007/8 was a repeat of past excesses and a reluctance to deal with the ensuing problems, even as they were generally recognized. Thinking at the time, for example, included:…Everything is fine because of globalization, the technological boom, the superior U.S. financial system, better understanding of monetary policy, and the phenomenon of securitized debt …
The book covers such a vast array of crises, times, and countries, it was hard for me to summarize briefly. For example, there are 100 pages of appendices and 50 pages of references, including both name and subject indices. Suffice it to say, the book represents an encyclopaedic description of many of the past and very recent financial crises and represents a quite valuable reference work for all involved in financial markets.
Bruce Grantier is President, Airth Inc.